Conclusion

Australia’s tax mix has evolved since Federation in response to significant events such as 2 world wars and the Great Depression. Since 1950, direct policy intervention has played a relatively small role in the tax mix. Increasing community demands of government, particularly during the 1960s and 1970s, have largely been funded through allowing personal income tax to increase through bracket creep.

The tax mix has remained relatively stable since 1980, with regular changes being made to personal income tax rates and thresholds to return some bracket creep. The composition of Australia’s indirect taxation has changed somewhat as tariffs and wholesale sales tax have declined or been replaced by a broader based consumption tax (the GST).

Importantly, the tax mix is dependent on how governments approach their economic and social policies, either through tax concessions or direct spending. Different governments may effectively pursue the same net outcomes through significantly different methods. 

Australian governments have often pursued their policy objectives through the tax system. For example, the Australian approach to retirement savings relies on tax concessions rather than higher taxes (or ‘social contributions’) and higher government pensions. 

Similarly, Australia’s GST does not apply to certain items, such as some foods, health and education. An alternative would be a broad tax with higher transfer payments to compensate target populations for the higher prices.

All taxes impose costs on the population, but the nature of these vary such that the choice between taxes always involves trade-offs. Taxes that aim to increase equity are often more complex, while taxes that aim to change behaviour are usually economically inefficient. Highly volatile taxes may assist fiscal management in some cases but hinder it in others. Taxes which are conceptually attractive, such as a those on owner-occupied properties, may also be unpopular. In the absence of government action, future increases in public spending (and revenue shortfalls as some taxes decline) will be funded through bracket creep, further increasing the share of personal income tax. 

Changing Australia’s tax mix by only 5% in any form would involve policies worth around $40 billion per year, roughly the size of the entire medical and pharmaceutical benefits system, and almost the size of Australia’s defence spending.